The Ministry of Power of India has recently announced the draft proposed amendments to the Electricity Act, 2003. The proposed amendments aim to be in line with the country’s changing electricity markets and systems, with their large renewable capacities and the emergence of a smart grid network.The Amendment proposes important changes in renewable energy, cross-subsidy, open access, operations & responsibility of ERCs, and many other changes. Some of these are discussed in brief below:

Renewable EnergyThe EA Amendment 2018 proposes several amendments that are favorable to the RE sector. Some of these are:

RPO has been separately defined. Related to this, the definition of “Obligated Entity” has also been introduced.

RGO means the Renewable Energy Generation capacity required to be established to be procured from Renewable Energy Sources, and sale of such energy along with the electricity generated from the coal or lignite based thermal generating station, by a generating company establishing a coal or lignite based thermal generating station.

Introduction of renewable energy service company which provides renewable energy to consumers in the form of electricity.

Introducing policies in order to support RE sector like National Renewable Energy Policy to promote smart grid, ancillary support, and decentralized distributed generation in accordance with the provisions of the Act;

A penalty of maximum Rs. Fifty lakh for non-compliance of RGO. (Reduced from 1 Cr. to 50 Lakh, the earlier penalty was on 1 lakh.)

For non-compliance of RPO, an additional penalty is proposed, which shall be minimum of Rs 1 per unit with a maximum of Rs 5 per unit depending on the extent of the shortfall.

Generation and supply of renewable energy will not require any license for such generation and supply.

Cross-subsidyThe draft EA Amendment proposes (a) time-bound reduction in cross-subsidies (CSS), and (b) CSS to be not more than 20% of the wheeling charge. These provisions are nothing new. The EA 2003 also included provisions for reduction of CSS. But these were watered down later.

The proposal that CSS be 20% of wheeling charges is significant, as if implemented, it will reduce CSS significantly. Also, the provision for charging “additional surcharge” is proposed to be deleted – this will also have a significant impact as in recent years states have used high additional surcharge as a tool to discourage open access.Open Access

The draft EA Amendment states the following with respect to open access:“With effect from the commencement of the Electricity (Amendment ) Act, 2018, all consumers having a connected load of 1 Mega Watt and above with the power system, may procure at their option electricity through open access under contractual agreement from any generating company, trading licensee, or from any other source.”This implies automatic open access, without the need for permission from the Discom. If implemented, this will be a radical change and can potentially transform the electricity market in the country. Separation of Carriage and ContentOne of the key provisions in the previous EA amendment (proposed in 2014) was the separation of carriage and content – i.e. further breakup of the Discom into supplier and network operator, and also allowing multiple suppliers in the area of the Discom. This proposal was met with significant resistance from the state when the Standing Committee of the Parliament viewed the amendment. As a result, the current amendment, while retaining the provisions, has significantly diluted the scope of carriage and content separation by leaving it entirely to the decision of the state government.In our opinion, this is a pragmatic approach, as it may allow the passage of the EA Amendment act without significant resistance from the states. However, the flip side of this approach is that such a reform will take a long time to be realized on the ground, and there will be significant differences between states. The EA2003 has heralded the break-up of Electricity Boards into Genco, Transco and Discom’s. Fifteen years on, the separation is still only partially effective in most states.

Others

Subsidy to be provided only through “Direct Benefit Transfer”. This can be a potential game-changer for the Discoms, and even for the entire sector. Today, subsidies are paid through the Discom, which, even though is a commercial entity, often works as a government arm. If DBT is introduced, it can pave the way for genuine Discom reforms on commercial principles.

Every proceeding before the Appropriate Commission shall be decided efficiently. Matters related to passing through in tariff on account of change in law/duties/taxes etc shall be decided in a maximum of 30 days. All other matters will be disposed of within 90 days. Regulatory Commission shall have all the powers of a civil court.

Development of market: Another important change has been the mandate to promote forward and futures contracts in electricity.

ConclusionWe believe that the proposed changes will have a wide and deep impact on the electricity sector. The promotion of RE and removal of roadblocks for development of RE and of open access in the country is a welcome step and one that was long overdue.The separation of distribution and supply function also signifies a fundamental shift in the way electricity is distributed in the country. However, by watering down the provisions for the same and giving states the choice to implement is a pragmatic way the government has adopted to allow the passage of EA Amendment. In any case, this change is likely to take a long time to start showing on the ground.Another radical change proposed is of paying subsidies through “Direct Benefit Transfer” only. This can be a potential game-changer for the sector and can pave the way for genuine Discom reforms on commercial principles.

The Infographic displayed above analyses the extent of usage of certain keywords in Electricity Act 2003, Draft EA amendment bill 2014 and the latest Draft Electricity Act 2018. The graph is prepared to understand how the government’s priority has evolved over the years from only conventional power to renewable energy as well. The word ‘Renewable’ is used 22 times in Draft EA 2018, 23 times in Draft EA bill 2014 and just 4 times in EA 2003. Similarly, Open Access is used 20 times in EA 2003, 32 times in Draft EA bill 2014 and 23 times in Draft EA 2018.

Terms like RPO and Smart Grid have no mention in EA 2003, while in Draft EA bill 2014 RPO was used once & smart grid 7 times whereas Draft EA 2018 smart grid was used 5 times and Franchisee was used the highest 8 times in Draft EA 2018. The term Cross Subsidy is used the least in Draft EA 2018 just once and 3 times in both EA 2003 and Draft EA bill 2014.

The Power Ministry will soon come up with the Amendment in the Electricity Act 2003, which will have strict penalties. The proposed amendment is likely to be presented in the parliament during ongoing winter session.

“We’re looking at presenting amendments to the Electricity Act in this session of parliament, for strengthening the penalty provisions manifold in the renewable purchase obligations, to make these more stringent,” said Mr. Piyush Goyal, Minister of Power, in a statement.

He said that the current renewable purchase obligation (RPO) is also being re-looked and added, “Earlier, we had certain set of targets till 2022, which we are bringing forward to 2019, we hope that 15 per cent of the renewable power purchase obligation can be enforced to 2015”.

The concept of RGO will also be introduced in the act, in which companies setting up new power projects will have obligation to generate 10% Renewable Energy component.

The amendment will focus on bringing RE into mainframe, as the REC market has not been performing well and there is little RPO compliance by the obligated entities. The RGO will help the govt. to meet its ambitious target of 100 GW solar power by 2022 with wind capacity addition of 10 GW per year.

The provision for forecasting and scheduling of Renewable Energy is expected in act. Also the concept of ‘Must Run’ and ‘Deemed Generation’ are also expected to be part of this amendment. The idea of ‘Hydro Purchase Obligation’ and the provision of giving Renewable status to large Hydro projects can also be included.

It will be interesting to see how this amendment affects the market performance, before the proposed Renewable Energy Act is passed early next year.

The Andhra Pradesh Reorganization Act, 2014 came into effect from 2nd June, 2014 and the new states of Andhra Pradesh and Telangana came in to existence from that date.

Reorganization Act 2014, Anantapur and Kurnool Districts which previously fell within the jurisdiction of APCPDCL have been reassigned to APSPDCL.

Before Bifurcation After Bifurcation

1. NPDCL 1. TGNPDCL

2. CPDCL 2. TGSPDCL

3. EPDCL 3. APNPDCL

4. SPDCL 4. APSPDCL

1. Impact of Bifurcation

Thus, consequent to the amended AP Reorganization Act 2014, the jurisdiction of the DISCOMs have been altered. Correspondingly,

Power purchase quantity of each Discom

Power purchase cost of each Discom

Aggregate Revenue Requirement of each Discom

Subsidizing and subsidized consumers

Included in the filings of each Discom will undergo corresponding changes, along with the volume of power supplied to subsidized consumers. All these changes will feed into the cost of service for each DISCOM, which will impact the level of subsidy to be provided to each DISCOM.

2. Share of Powers between DISCOM

Following substation will be become Inter Discom Points between APSPDCL and TGSPDCL.

11 KV feeder originating from TGSPDCL Substation of Mahbubnagar District is feeding power to Kurnul District.

Two 11 KV feeders originating from APSPDCL SS of Kurnul District are feeding power to Mahbubnagar District.

Two 11 KV feeders Originating from Srisailam Right Bank of APGNECO are situated in Kurnool District but serving power to consumers of Mahbubnagar.

Commission has granted permission to avail interstate transaction between APSPDCL and TGSPDCL using existing Infrastructure and energy settlement till March 2015. If power plant is connected at any of these feeders, the contradiction arising out of geographical location has to be resolved.

Further, the respective shares of power allocated between the four Discoms originally fixed in G.O.Ms.No.58, dated 07.06.2005 under the 3rd Transfer scheme has been amended in G.O.Ms.No.20, dated 08.05.2014. As per the GO, the revised share of 46.11% for Seemandhra is higher than the existing allocation of 38.07% (increase of 8.04%), while the new 53.89% allocation for Telangana is lower than the existing 61.93% allocation. Allocation of power to new DISCOMS is another political issue.

4. Merit Oder Dispatch and Energy Settlement codes:

A common merit order dispatch month wise for all Discoms. i.e., for entire state has been previously considered by the Commission in its earlier examination of the filings. This merit order dispatch is no longer relevant in the light of the creation of the two new states of Andhra Pradesh and Telangana and the respective DISCOMs have to redraw the merit order dispatch for the two states separately.

Energy settlement codes and polices of old AP may be redefined.

5. Tariff Order for FY-14-15 :

Thus, the existing tariff filings mentioned in the reference cited, which were a valid base for the Commission to issue a Retail Supply tariff order on 29.03.2014 have now been overtaken by events and the creation of two new states. These filings can no longer be considered by the Commission for the purpose of determining tariffs because the jurisdiction of the four DISCOMs in the two new states has been changed. Significant Policies involving budgetary Support need to be confirmed by newly formed states.

6. Impact of Subsidy:

Further the DISCOM filing contains zero tariff proposals for certain categories of consumers. This zero tariff was proposed as per then extant policy of the erstwhile Government of Andhra Pradesh which anticipated payment of subsidy to meet the deficit u/s 65 of the Electricity Act, 2003.

In this scenario, subsidies and polices of new state will have impact on Cross Subsidy Surcharge. For the new state it is more likely that subsidies will be announced which will have impact on CSS.

Under this condition it is difficult to predict Impact of Bifurcation on existing PPAs.

The current role of the Distribution Licensee has been broken up into system business (Distribution) and supply (supply licensee).

In the new system, the Distribution Licensee will be responsible for “operate and maintain a distribution system to enable supply of electricity”

The role of supplying electricity will be that of a the “supply licensee”

This segregation of system operation and supply is a major step, and down the road will allow multiple licensees to operate in a single area.

The state government will devise a scheme to effect such a segregation

The supply licensee will have to take “Universal Service Obligation”. The proposed draft requires the licensee to be “supplier of last resort” and also that they will not resort to load shedding or power cuts.

Efforts for development of forward markets have been emphasized

The State Commission has been made responsible to specify a road-map for time bound reduction of cross-subsidies

Proceedings before a Commission will be disposed of within 120 days. In the event of delay, the Commission will record the reason for such a delay

Penalty under section 142 has been increased from Rs 1 lakh to Rs 50 lakh. Additional penalty for each continuing day of default increased from Rs 6,000/ day to Rs 50,000/ day

Definition of Renewable Energy has been introduced.

“”renewable energy sources” means renewable sources such as small hydro, wind, solar including its integration with combined cycle, biomass, bio fuel co-generation, urban or municipal waste and other such sources as approved by the Central Government in consultation with MNRE from time to time prescribed.”

The proposed amendment leaves out some very important changes from the renewable energy perspective.

The state RPO regulations have a weak penalty clause – penalty at the forbearance price of RECs needs to be set aside by the company and used for specified purposes and on the directions of the commission. However, incorporating this in Section 142 would have made it much stronger

There has been ongoing confusion (and various petitions) on the issue of jointly promoting cogeneration and renewable energy. The issue stems from the reading and interpretation of the EA. However, the current draft does not attempt to clarify this issue.

CERC, in Statutory Advise given to the Ministry of Power (dated 28 Dec 2011) had said that “we build in the Act itself the requirement for a long-term RPO trajectory and deterrent against non-compliance of RPO”. It further mentioned that a penalty for non-compliance of RPO can be in addition to that already under section 142.

The Statutory Advise also incorporated points on specific market instruments like REC, on definition of co-generation and specific provision on RPO applicability on open access consumers and captive power producers

However, the draft does include a clause that makes the National Electricity Policy and Tariff Policy “binding on all including Appropriate Commissions, Appropriate Government, authorities, licensees, generating companies (and) consumers.”

At present RPO trajectory is defined in the National Action Plan for Climate Change. Solar RPO trajectory was also included in the National Tariff Policy by way of an amendment. If these policies indeed become ‘binding’ then it will pave the way for easier changes and implementation of RPO and development of REC markets. Nevertheless, in our opinion, a direct reference in the EA would have been stronger. And the need for the